An Executive Compensation Agreement is an agreement between a company and a potential executive whom the company would like to hire for employment. These agreements lay out the terms of an executive's employment, including but not limited to provisions covering the executive's compensation, including a bonus structure, scope of employment, grounds for termination, and severance package available upon termination. Specifically, when drafting an Executive Compensation Agreement, be sure to include the following provisions:
1. Opening Recitals. Be sure to first include the date of the agreement, the name of the company and the executive (and any abbreviations of the names that will be used throughout), the address of the company's headquarters, and general purpose for the agreement. This recital can be as simple as: "Company and Executive are forming this agreement for executive to provide company with services as __________", and list the title of the position.
2. Terms and Conditions. The first few provisions should lay out the terms and conditions of the agreement. This should include the title of the position. It should also include the length of the term of employment, and whether or not the term is renewable by either party or upon mutual consent.
3. Scope of Duties. The scope of the executive's duties and the expectations of the company should be laid out in detail. In exchange for compensation, what is the executive being hired to do? Will he be required or expected to meet certain financial goals? How many employees will he be managing? These questions should be answered in detail. If describing these duties takes up several pages, it may be advisable to create an attachment and refer to it in the agreement. If this is the case, the provision could read: "In consideration of receiving compensation, executive agrees to perform the position, duties and office outlined in Attachment A."
4. Compensation and Benefits. The executive's compensation and benefits package should also be covered in detail. This should include annual salary, bonus opportunities for achieving certain goals, and stocks and stock options. His benefits package should be covered, listing his vacation time, health benefits, travel reimbursement, 401(k), pension (if applicable), disability pay, etc. Again, if the drafter prefers, he or she may want to draw up this information on a separate document, attach it to the agreement, and simply refer to the attachment.
5. Termination. Usually an executive is subject to termination under certain circumstances or upon certain events. These grounds for termination must be described in this provision. There are several scenarios that may be in play:
a. If the executive is to remain an "at-will" employee, then management can terminate the executive's employment at any time, for any reason. If this is the case, the executive should be able to do the same.
b. In the alternative, the company may be allowed to fire the executive for any reason, but must provide the executive certain notice, usually in writing. An executive may be able to negotiate for as much as twelve (12) months written notice. Again, here the executive might be required to do the same.
c. Alternatively, the company may only be allowed to terminate the executive for "good cause". If so, the term "good cause" must be defined. Usually good cause is defined as the failure to achieve modest financial targets or if the executive commits a bad act against the company, such as theft, or violates his fiduciary duty, duty of loyalty, or duty of confidentiality.
These are the most critical provisions that must be addressed in an Executive Employment Agreement. Provisions covering compensation upon termination, covenants regarding inventions and copyrights, protection of confidential information, covenant not to compete, severability, and governing law should also be included. For more information or to read actual clauses from Executive Employment Agreements, please visit the agreement section of this website.
While Blue Cross and Blue Shield plans' executive compensation may seem insignificant compared to corporate bonuses and golden parachutes at many large for-profit companies, the plans are not immune to criticism for their compensation and severance packages, especially in a severe recession. Several not-for-profit Blues plans ? citing the economic turmoil or their own lower financial results ? have reduced senior executive compensation packages and bonuses.
Tim Bartl, a spokesperson for the Center on Executive Compensation, tells The AIS Report that companies are making changes to executive compensation plans "directly as a result of the economic downturn. These changes involve reducing salaries and changing the short-and long-term incentive opportunities to reflect the expectations of lower performance going forward." Overall, he says, "According to Equilar, Inc., total compensation of S&P [i.e., Standard & Poor's] 500 executives at companies that have filed their proxy statements so far, CEO pay has dropped by 6.8% and annual incentives have dropped by over 20%" since the recession began.
Bartl contends that the majority of public outcry against senior executive pay has been against financial service executives. Their packages often "involved a modest salary, with a large discretionary annual incentive, which comprises the vast majority of pay."
Some Blues Plans Criticized for Severance Pay
Still, Blues plans have received criticism of the packages paid to their leaders. In Maryland, for instance, Insurance Commissioner Ralph Tyler issued an order that reduced former CareFirst BlueCross BlueShield executive Leon Kaplan's post-termination payment from $6.7 million to $2.7 million. The company sought to lower Kaplan's termination pay under a Maryland statute to what was considered "fair and reasonable" for work performed. Tyler authorized the lower payment.
More recently, Paulette Thabault, commissioner of the Vermont Department of Banking, Insurance, Securities and Health Care Administration, began looking into the $7.2 million retirement package that Blue Cross and Blue Shield of Vermont (BCBSVT) paid to former CEO William Milnes Jr. in 2008.
"That amount was larger than we expected," Thabault said. She added, "I am not going to rule out a regulatory response." Thabault does not have the same authority to approve a change in executive compensation that the Maryland commissioner does, but can "investigate BCBSVT and all insurers, and to craft supplemental orders whenever necessary," spokesperson Peter Young tells The AIS Report.
Indeed, the department required BCBSVT to "implement a number of changes related to executive compensation as a result of a detailed inquiry in 2007 into BCBSVT's administrative costs," Young says. While he did not go into details, he explains that the commissioner required the company to follow up on some of the recommendations resulting from the inquiry regarding the structure of bonus compensation at BCBSVT.
Last month Blue Cross and Blue Shield of North Dakota (BCBSND) fired CEO Mike Unhjem. When the plan said that his severance package included $2.2 million in payments under his 2007 employment agreement, state House Democratic leader Merle Boucher responded by proposing a bill that would have levied a 70% tax on earnings of more than $1 million for not-for-profit CEOs. But House Republicans rejected the proposal, and the bill died.
Still, those amounts pale in comparison to the $15.3 million Gail Boudreaux received when she left her position as president of Blue Cross and Blue Shield of Illinois, a Health Care Service Corp. (HCSC) subsidiary. Boudreaux's resignation was announced a month after the company named Patricia Hemingway Hall CEO in November 2007.
Strategies on Compensation at Blues Plans
While HCSC spokesperson Ross Blackstone did not comment on the Boudreaux's severance package, he explains that its executive compensation "is a pay-for-performance plan" based on company accomplishments. The program "is designed to allow us to compete for and retain talented employees to lead our company and provide our members with the best value in products and services," he adds.
Blackstone contends that the company and its Blues plans in Illinois, New Mexico, Oklahoma and Texas "have performed very well over the past several years."
The compensation practice, he asserts, is reviewed annually "to ensure it's in line with our industry's expectations. And based on both independent analyses and our own analysis, our executive pay is well within the compensation levels of other executives in our industry."
Other Blues plans, such as Excellus BlueCross BlueShield, are reducing executive salaries in 2009. In its 2008 results, the plan said CEO David Klein, who received total compensation of $2.7 million in 2008, will be paid 25% less in 2009. Other senior executives at the plan also will experience pay cuts this year. But "senior management executives earn performance incentive pay on a lag basis for multiple prior years' performance," the plan said. So "compensation reported for 2008 may have risen due to favorable performance in 2007 and earlier years." The plan, which posted a net loss for 2008, changed executive compensation as part of a larger effort to recover financially in 2009.
Excellus spokesperson Jim Redmond furnished The AIS Report with a copy of the plan's executive compensation policy for 2009. The plan explains that executive compensation packages are determined on a case-by-case basis. And packages are designed without the ability to offer stock options, as for-profit firms can. Excellus says senior executives are enticed to join and stay with the company through a combination of long-term and short-term performance-based incentives. The rewards are tied to goals, including financial stability and customer service, the company says.
The board's compensation committee is assigned to conduct "rigorous national reviews of executive compensation" for the CEO and other company leaders, according to Excellus. The committee also uses benchmark compensation information, "particularly among health plans of similar size, and recommendations" from independent national compensation consultants, such as Mercer LLC and Watson Wyatt Worldwide, Inc., according to the plan. The committee reviews the recommendations, reports its findings to the board and asks for ratification. "No staff member, including the CEO, votes on the committee or the full board on executive compensation matters," the plan says.
HMSA Freezes CEO's Salary
Hawaii Medical Service Association (HMSA) in its full-year 2008 results release said CEO Robert Hiam volunteered to freeze his base salary in 2009 at $1.3 million, an action the board approved in light of the recession.
HMSA's compensation and human resources board committee determines executive compensation and looks at local and national companies with traits similar to HMSA to help determine the appropriate level of pay. As with Excellus, a human resources consulting firm helps the committee establish appropriate levels of executive compensation.
Performance incentives received by HMSA executives in 2008 are "based on strategic measures met for 2005, 2006 and 2007," the company said.
Other Blues plans reducing executive compensation include Blue Cross Blue Shield of Michigan (BCBSMI) and Blue Cross Blue Shield of Massachusetts (BCBSMA). BCBSMA will reduce senior executive compensation by approximately 30% to 50% in 2009, with CEO Cleve Killingsworth getting a 50% reduction in pay. The plan said this is part of a series of steps to reduce administrative spending. BCBSMI said that senior executives would take a 5% annual salary cut and won't receive a 3.8% annual increase. BCBSMI says the 3.8% represents a freeze on executive salary for the second time in the past three years. The plan is making the moves "to partly offset projected losses on BCBSMI's individual health plans."
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